45. Surfs Up manufactures surfboards. The company produces two models: the small board and the big board. Data regarding two boards are as follows:
Products Direct Labor Hours per Units Annual Production Total Direct Labor Hours
Big 1.5 10,000 boards 15,000
Small 1.0 35,000 boards 35,000
The big board requires $75 in direct materials per unit, whereas the small board requires $40. The company pays an average direct labor rate id $13 per hour. The company has historically used direct labor hours as the activity base for applying overhead to the boards. Manufacturing overhead is estimated to be $1,664,000 per year. The big board is more complex to manufacture than the small board because it requires more machine time.
Blake Moore, the company's controller, is considering the use of activity-based costing to apply overhead because the surfboards require such different amounts of machining. Blake has identified the following four separate activity centers.
Volume of Annual Activity
Activity Center Cost Drive Traceable Cost Big Board Small Board
Machine setup Number of setups $100,000 100 100
Special design Design hours 364,000 900 100
Production Direct labor hours 900,000 15,000 35,000
Machining Machine hours 300,000 9,000 1,000
A. Calculate the overhead rate based on traditional overhead allocation with direct labor hours as the base.
B. Determine the total cost to produce one unit of each product. (Use the overhead rate calculated in question A.)
C. Calculate the overhead rate for each activity center based in the activity-based costing techniques.
D. Determine the total cost to produce one unit of each product. Use the overhead rates calculated in question C.
E. Explain why overhead cost shifted from the high-volume product to the low-volume product under activity-based costing.
F. Discuss the concept of cross subsidies between products as it applies in the case.
The problem deals with estimating product cost under traditional costing and activity based techniques.